David R. Henderson  

How to Help Poor People in Poor Countries, Part 1

Kling, Krugman, and Krugman on... How to Help Poor People in Poo...

About 40 to 60 percent of the economists around my campus--the Naval Postgraduate School--get together for a brown-bag lunch around a table once a month and just talk about whatever is on our minds. We're an eclectic bunch. There are Keynesians, non-Keynesian, one who I think is an Austrian, and monetarists. There are various degrees of belief in the group in using free markets to solve problems. No one seems to believe in maximum price ceilings although I'm not sure about what some think about a price floor on wages. The topics jump around a lot, which I like--anything from submitting papers to particular journals to any of a number of economic policy issues. A few weeks ago, we were discussing government-to-government foreign aid. Some people were advocating it; most were skeptical or outright against.

I had an idea. I told everyone that, from the tenor of the discussion, it seemed clear to me that virtually everyone in the room (there were about 9 of us) cared about poor people in poor countries. I asked them to imagine that they had the order of magnitude of wealth that Bill Gates has--at least $10 billion. How, I asked, would they use some part of that wealth to help those people? They could specify the amounts, the organizations, and the causes. I asked them not to talk to each other and to take a few minutes to write things down. Then each person took a turn laying out his/her causes/expenditures.

They let me pick up their lists and everyone gave me permission to report his/her list without attribution to particular people. I found the exercise fascinating. It confirmed one of my prior views about what people would say and surprised me in two other ways that, given that I was an economist among economists, should not have surprised me.

So I invite you to engage in the same exercise and report your results here in the comments. But to make it really work, don't just write down something quickly. Take at least a few minutes to think.

Tomorrow I'll share the list my economist colleagues came up with.

Comments and Sharing

CATEGORIES: Income Distribution

COMMENTS (28 to date)
Peter H writes:

I would spend it, to the extent practicable, on infrastructure, particularly power, water, and highways. None of these things needs to be very money losing, so by imposing charges for power/water/tolls a bit above marginal costs, the operation can be, if not self funding, certainly stretching each dollar spent substantially. Even if you don't connect each house to a water network, having a consistently available supply of safe fresh water is a huge boon to the health and efficiency of communities. Ditto for electricity. Highways are perhaps the biggest, and most undervalued, of the three. A community on a highway no longer depends on local networks of middlemen to bring goods to regional/national markets, and can be connected to world markets for goods.

None of this stuff is very donor friendly, especially when you charge poor people for it, instead of giving it away for free, but by making it self-sustaining after the initial capital costs, you don't end up with white elephants, and you end up with the potential to build lasting improvements in peoples lives.

OneEyedMan writes:

AIDS treatment and vaccinations seem to address the most serious utilitarian problems but I believe the marginal value of additional charity in these areas is low. Increasing female education / literacy in the third world seems like a serious contender because of the enormous benefits in child-mortality, female freedom, and other effects, but I could not find any large organizations that specialize in literacy. I assume I could just start my own foundation and might just do that.

Another possibility is grants and investments to encourage the development and marketing of salinity and drought resistant crops. Again, I could find people working in this area but not with sufficient scale. Given the limitations of fresh water in the Middle East and Africa, this could be a huge win.

Philo writes:

The causes of poverty--the barriers to achieving wealth--seem to me to be mainly social (cultural and political). For the average third-world poor person, the best thing that could happen to him is transportation to a developed country--whichever one into which he would best fit culturally--and receipt of a one-time stake that would let him get started supporting himself. But with current immigration laws it would be impossible to do this on a large scale.

Perhaps one could bribe a dictator somewhere to let one start a Paul-Romer-style "charter city." The scale would still be disappointingly small, but if it was successful it might have considerable indirect influence.

But my choice would be to adopt an even less direct approach: simply to invest the money as productively as possible, and hope that in the long run benefits would "trickle down" to the poor. That wouldn't do much for present poor people, but maybe it would benefit future ones.

Tim Worstall writes:

Two different approaches.

1) Spend the money in the West (ie, the industrialised countries) on political lobbying so as to achieve the following:

a) Unilateral free trade on the part of the rich countries. The poor ones can do whatever they like.

b) Abolition of TRIPS.

2) The second approach. Bit geeky, but stay with me. Tariffs are a horrible way for a country to raise money. However, they're also, in a near barter or poor economy a very simple way to raise the necessary tax money. So spend the aid on helping the poor countries construct taxation systems that don't depend upon tariffs.

fructose writes:

The best way would be to send cash directly to poor civilians in those countries. They know what they need better than I do.

Alternately, you could invest it in a fund and use some part of the interest to create a program that bribes (or "rewards") leaders who don't screw with the markets. Since political rent seeking is a really inefficient process, $10M dollars a year might be enough to incentivize good behavior.

ross williams writes:

I would invest the vast majority into scientific research. Think Norman Borlaug style, not Hubble telescope. A much smaller amount would go into migratory support to charter cities. A smaller sum still would go to the Red Cross. The staggering of funds is to address different aspects of poverty, to provide targeted relief to acute issues and more diffuse benefits to complex poverty situations. I would only expect the migratory support to be a self-sustaining operation, the other two would not recover costs.

Nron writes:

In third world countries the problem is a perpetually low standard of living. This is caused by a great variety of factors, none more troublesome than consistently high unemployment. 10 billion is not enough to appropriately tackle this problem, so I would use the funds to raise the standard of living for as many people as possible. To achieve this I would start up businesses and employ hundreds of thousands of people.

This micro solution would have a greater lasting effect on more people than ten billion spent of infrastructure or wasted in charities, which have little direct impact in raising standards of living. Jobs are what people need in the third world.

Another idea would be to fund a free market PAC that would pour these funds into lobbying for the liberation of third world economies. For example, most African economies are reluctant open their agriculture markets to genetically altered corps, citing environmentalists arguments that these crops are dangerous. My PAC would combat such silly assertions and if successful, the increase food yields would dramatically reduce hunger for that specific third world country. The reduction in hunger would raise the standard of living for the people in the affected third world country and be the first step in reducing poverty.

Arnie writes:

Brilliant question, David.

Even though this probably violates the rules of the questions, I would do the following.
1) spend 1 billion to buy political influence here in the US to the end of expediting 1 million visas from poor countries so that they could move to the USA immediately.

2) spend another 1 billion to move the 1 million people here.
3) there are 17 million empty housing units here, so the Feds work out a deal to give them all housing. GIVE, not loan nor lease.
4) spend the remaining 8 billion on transitionary education via the web on housing maintenance, language study, and how the US works from a free market perspective.

I firmly believe that the trillions spent over the years to this end has only proven that it can't be done. Forgive the bending of the rules.

john writes:

spend it all teaching the poorest in the poorest countries how to become self sustainable without the need for a parasitical government using techniques like permaculture & eco-house building.

Patrick R. Sullivan writes:

I'm with Nron, start businesses (especially if you're Bill Gates and that's what you know). That will give the poor opportunities they don't have now.

Ann Sherman writes:

I think a major barrier to development is that countries do not think of their economic, political, legal and financial systems as forms of technology, and thus they feel no need to modernize them. They're open to new technology when it comes to, say, cell phone networks, but in terms of government and economics, they fall back on saying 'that's not part of our culture, so you can't expect us to change'.

I would put the money into two areas:

1. developing standards for international best practices for legal, financial, economic and political systems, and for various government functions, similar to the standards developed in many industries (countries should learn from well-managed businesses in this sense), and then fund detailed reports ranking under-developed countries based on how their systems compare to those international best practices;

2. fund made-for-TV movies, commercials, etc. to help the general population in various countries understand the costs of corruption and bad government, the benefits of markets and competition, etc.; when Hong Kong managed to greatly reduce corruption, much of what worked was dramatizing cases of people that had been caught taking bribes, etc., and using similar ways to help people look differently at corruption; if Oprah Winfrey really wanted to help poor people in Africa, then her African editions of O magazine would include such stories.

Dan S writes:

These are all tongue-in-cheek (I don't actually support using violence to this end), but here goes, in order from least to most violent, all based on the premise that the impact of a dollar can be multiplied many times if it leads to freer markets:

1) Airlift millions of copies of "Capitalism and Freedom" and a basic micro text to as many people as possible.

2) Simply bribe an existing dictator or two to allow complete free markets, free trade, more open borders, to root out corruption within the police and fire everyone else, and to disband the military in exchange for US protection. Hopefully by the time he dies, there will be some movement toward a more open and democratic form of gov't (alternatively, go with the charter city idea mentioned above).

3) Send a private military company to swiftly take over the country and impose the policies above.

Wayne writes:

I would use the 70% of the money to secure property rights. As Philo writes, the main issues are the barriers to building and securing wealth.

This could mean buying real property in their area and creating islands of security (like a charter city). Or, it could mean lobbying their governments to recognize the property rights of slum dwellers (like what they did in Peru). Poor people should be able to acquire, secure, and dispose of property however they see fit. No regulations and no smart-local-green-whatever growth incentives are needed. With market oriented property reforms, I think that entrepreneurship, credit markets, and other sustainable (in a PSST sense) institutions would arise.

I like Nron's idea of starting businesses, with a slight difference. I would use 30% of the money to educate the developed world's entrepreneurs about opportunities in the developing world. Entrepreneurs in the developed world have both financial capital and business knowledge capital. Getting more into the developing world will act to fund ventures and spread best business practices.

SWH writes:

Acknowledging that fundamental change happens slowly, the action taken must not be one to induce rapid change, else the actual consequences will most likely be unintended and not good. Knowing that application of too much money (or its equivalent) only corrupts, the action must not immediately increase wealth. So the action must be one that only enables the population to make its own way, on a path it would also choose otherwise. Paying for health improvements and business infrastructure (without too much concentrated wealth infusion), and education infrastructure seems to be viable.

Stan writes:

I'd spend it all or most of it on anything that effectively promotes the principle of, and protects private property rights. But I'm at a loss as to what exactly that would be.

Evan writes:

Fund research to develop a conscientiousness-enhancing drug (like Adderall, only more effective and with less side effects) and make the patent public domain. Establish a foundation to distribute it to the poor. This would have the effect of blowing every single serious objection to immigration from third world countries out of the water, since high-conscientiousness people are unlikely to commit crimes or go on welfare.

After that is done I would begin aggressive lobbying to let more people immigrate to first world countries. This would likely work more easily than it would now because the drug would make people in the first world more productive and wealthy, so they'd feel less threatened.

Alex writes:

Bring people to the US.

Michael Strong writes:

Global poverty is caused by poor legal institutions; North Korea and South Korea, East and West Germany are the simplistic examples. But consider that when an unskilled Mexican laborer crosses the border, he (there are estimates that 20% of 18-24 year old Mexican males are in the U.S.) experiences an increase in wage rates of 10x to 20x (from roughly $6 per day to $60 - $120 per day). No charity can compete with that kind of an income (and over time wealth) gain.

What most people seem not to be aware of is that poor countries have less economic freedom than do rich countries; see the World Bank's Doing Business index and/or the Fraser Economic Freedom index. The example I like to point out is that it is easier to start a business, or fire an employee, in Denmark than in any developing nation. This enormous deadweight loss (18 documents to import a good into the Democratic Republic of Congo) means that indigenous entrepreneurs have little chance of creating businesses (and jobs) unless they are already wealthy and/or crony capitalists.

So one natural inference from this fact would be to allow for much freer immigration into those nations with decent legal systems, so that poor people can move to rich nations and make more money, and then send remittances home (already a leading source of income in many poor nations).

The alternative approach is to import world-class legal systems into poor nations. Paul Romer's Charter Cities is one example of such a strategy, though the weakness of Romer's approach is that it requires government-to-government treaties, a long shot in the best circumstances (though Honduras, to their credit, is moving towards such a possibility).

Instead, I'm working on a project whereby world-class law would be imported via choice of law and choice of venue clauses in existing international arbitration agreements. In effect multinational corporations ALREADY have access to world class law in their contracts due to international arbitration. They can, in effect, adjudicate a dispute in Mexico or Egypt by means of courts (and laws) in Holland or the U.S.

For details for how we are working on this project, request a whitepaper from me (michael@flowidealism.org) or come to the "Future of Free Cities" conference in Roatan, Honduras, sponsored by UFM and the Seasteading Institute.

Of course I would have the funds go to our project.

Maniel writes:

I would open an S&L on site, with small loans available to entrepreneurs who have reasonable plans to invest and to repay the loans (so that money is available for the next borrower). Of course, it would be helpful if George Bailey were available (not to mention Clarence).

HispanicPundit writes:

I've actually been thinking about this a lot lately. What is the best form of charity? Clearly, just giving a bum on the streets money is a waste. He'll probably just spend it on alcohol and is he really reformable? Clearly you want the money to go to something that is an investment - that grows, like paying for a poor persons college. Not only do you give them money, but its money that actually solves their problems - long term. But even that has its flaws. After all, they are living in the United States - our "poor", are richer than 90% of the world.

So then the answer has to do with the worlds poor - not USA's poor. India, Africa, China, places like that. But you dont want to just give it away either - it robs them of the dignity that comes with "earning". One thing that I thought about is that when you visit poor countries, and someone offers you a service - say wash your windows, or clean your tires - you tip BIG. Not only are you hitting the target group, but you are rewarding them for a service, and having people participate in the economy makes us all better.

But now were at three qualities of efficient charity: a) targets the clearly truly poor, b) an investment that grows and solves their poverty long term and c) one that gives dividends to the rest of us.

As contrarian as it sounds, I am convinced that the best form of charity is giving jobs and education to the worlds poorest countries - like China's new growth and capitalist turn. As Tyler Cowen mentioned in his book Economic Stagnation, you get alot of immediate growth and return when a poor population is brought into the world economy - through education, jobs and industrialization. China is at the same stage that the United States was say 100 years ago. And we can expect the same returns - as more and more people are given the opportunity to advance through higher education and innovation. Not only does this make the poorest people better off, but the rest of the world gets alot of the dividends (think of all the added medical innovations, technological innovations, and general increase in standard of living we will experience because of China's 1 billion+ citizens increased standard of living).

So in the end: what would I do? Probably spend it on whatever makes businesses MORE likely to invest in China, India and other poor countries that bring them further into the economic fold and pull them and their people out of poverty. Maybe invite Intel to open up a training center and design center in a growing country - if the decision ends up losing money, you promise to refund them their losses. If not, you entice another company.

Something like a company insurance policy with the goal of targeting especially poor countries. That is what I would do.

Arvind C Abhang writes:

As i am from India i know about the poor peoples condition in India. I tell u about India only as i m not aware very well about the condition of poor people in other countries though its not different than any common poor person, but i can't tell the exact reason why is it so.In India i think that the most important reason for poverty is our population. Though i have the money by it i can't able to control population. and though our government is trying hard to control it,is not sufficient. To control the population the peoples should be educated. So they will come to know the seriousness of the main problem behind poverty. So if i m a wealthy person i will spend my money on the education of peoples due to which many problems will be solved.

Eric Rall writes:

The first thing that occurs to me would be very basic public health improvements (vaccinations, sanitation of drinking water, mosquito nets, etc). But there's already quite a bit of effort being put here, and I'm not sure off the top of my head how much low-hanging fruit is left.

The next idea would be to spend some portion of the money in the United States and other first-world countries to lobby (either congressional lobbying or a public advocacy campaign) for expanded legal immigration, especially from the poorest countries. Giving people a chance to help themselves through their own efforts is generally preferable to handouts, and immigration to first-world countries seems to be an extremely effective way for citizens of poor countries to improve their situations. I'm a little uneasy about this, due to my general skepticism for people trying to change government policy to address a problem when the same efforts could be used to address the problem directly, but this is a method that can only be done through the government because it involves removing a government barrier.

Another idea would be to try the "charter city" concept, to fund an effort to set up first-world institutions in selected areas of third-world countries.

I'd need to spend quite a bit of time and effort figuring out the most cost-effective way of helping people, but I suspect I'd wind up spending most of my efforts on public health and sanitation.

c141nav writes:

Regardless of the recommendations let's try to keep a couple of things in mind.

1. We are talking about the welfare of human beings. Let's treat them like human beings - not just numbers.

2. People - human beings - respond to incentives.

Ryan writes:

1) Only help those that are willing to help themselves (don't mean to come off as conservative). Preliminary elections would be held at local communities to decide whether my help would be taken (this would take a lot of gumption in very corrupt countries). The contract being voted for would define property rights regardless of the governing countries code.

2) Assuming the election goes fine, I would have an independent police party (of which I would be accountable for) enforce property rights and ensure that those that are helping themselves a) don't become victim of their neighbor and b) don't become a victim of their native government (much trickier).

3) Fund schools in the communities that have accepted help. To attend would require some form agreement where certain tbd terms are met in order to maintain enrollment. Hopefully, this would give an incentive to show up and appreciate the knowledge and skills being taught. Also, each person would be accountable for their own education.

4) Lobby aggressively in the country's capital to ensure that my measures would not be hindered by institutional corruption (I admit this in itself would encourage corruption). Hopefully, it would encourage local governments to compete for contracts to be voted on.

5) Hope for the best. This is a pretty idealistic, econ 101, approach. Yet, if I had the resources I would give it a shot.

James writes:

I'd donate the money to schistosomiasis treatment. It makes people unable to be productive for a really long period of time, it's widespread, and it's cheap to cure.

John writes:

I would get the 4 volume set Ingenious Mechanisms translated into the local written language, providing teaching when needed, or into an electronic media with a verbal translation.

This will provide the local group access to a wealth of practical design knowledge for solving daily problems. They can then choose which improves their lives the most.

Kent Gatewood writes:

Use it all to bring people to America.

Then they can use their new found political rights to loot my IRA.

Problem solved.

Can we try this on Cyprus first?

Charlie O writes:

Use some of the money to setup prizes for drugs AIDS/Malaria/Other drugs that provide a big benefit to people in poor countries. I believe the Gates foundation does some of this already. The cash prize gives incentive to drug companies who know they cannot make a lot of money in poor countries.

Using the money to help develop businesses should be helpful. But I don't know how to best go about this sort of investment.

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